The exchange rate literature contains two inconsistent strands. There is a large theoretical and empirical literature on overshooting. In that literature overshooting is an important explanation for exchange rate volatility. A separate literature says that exchange rates are martingales and that...

Using VAR, a large literature claims to find evidence of some form of Dornbuschovershooting. But the evidence is fragile in the sense of Leamer. The literature uses the wrong test for overshooting, unusually narrow confidence intervals and questionable shocks. In addition, it is difficult to...

Several articles claim that Eichenbaum and Evans (1995) shows that nominal exchange rates experience a delayed version of Dornbusch overshooting. These same articles usually claim that impulse responses similar to those in Eichenbaum and Evans are evidence of such overshooting. But Eichenbaum...